Group / Intercompany NettingDo you have multiple subsidiaries with intercompany payments? Do they pay the IC-invoices to each other direct? -This bears high risks, is inefficient and cost a lot of money!

Netting, derived from the action "to net" is a process in which receivables and payables are compared to each other for all group companies andcleared, i.e. settled vs. each other through a centralized Netting Center - also called Corporated Netting Center. Final reason is the payment(mostly, but not always in cash), reduced to just one amount which is paid / received only. But the largest benefits are not visible at a first glance! Provided that at this point netting in organisational terms is only intended for for receivables and payabels occurred within a legal groupstructure: the clearing of accounts receivables- and payables is also common practice, but ends with the single vendor-customer relationship.However, the principle idea is the same.Way of posing a Problem / TaskMeet this example also your group?•XYZTest Group, holding in country A with subsidiaries (controlled) in countries A, B, C, D, E and F.•A delivers to B and E and invoicesin currency A.•C delivers to A and D and invoices in currency C.•D delivers to E and invoices in currenc E.•etc etc.Therefore following problems arised and in relation to it, these risks will arise:A) Quantitative Impact1.High expenses for payment orders because of a large number of payment transactions.2.Foreign exchange risk at the receiver of the rendered service. Those are often in other countries and/or receivables in other currenciesthan the one they need to settle the invoice. Conclusion: due to internal process external risks are build up! They can be measuredquantitative for example with Value at Risk resp. Cash Flow at Risk.3.Foreign Exchange costs: for the same reason as 2. above the reciever of the service has to pay relative quite low amounts. Oftendedited/credited from an account, which is denominated in another currency than the invoice-currency. These additional transaction costsare approx. 2%-4% of the total invoice amount! In these days, where margins have to be calculated on the second digit after the commaand agreed in heavy negotiationes, this way of paying invoices can be considered as pure destruction of money.4.With every single payment also the risk increase of manual input errors that it will be paid too much or too less. This leads to binding ofintensive human resource power what is at the end expensive. If you would measure these items for a specific period the one and otherCFO would wonder what he pays for this unfavourable process.5.In case the foreign exchange risk would be centralized by a netting process, the netting center would be able a) to eliminate these fx-riskin a first step (overlay) and b) to manage the remaining amount per currency with hedging, for instance fx-swaps.B) Qualitative Impact1.The counterparty risk increase with every single transaction. Imagine, you give your bank a payment order and your bank has no directnostro account with the correspoding bank of the beneficiary. Such payment processes through intermediary banks are very common inthe international payment system. Assume that the intermediary bank is Lehman Brothers. You as ordering party don’t know that and haveno control about it. But in case of a total shortfall of this intermediary bank you have to pay this total loss! Because this risk isjust hardly to be quantified we mention it here as qualitative risk.2.Monthly and quarterly intercompany reconciliation is unpopular, time consuming, fraught with risks and therefore need to be implicitelyavoided. A centralized reconciliation which is always up to date can be outweight in these times with gold. Due to the permanent clearingprocess, the typical monthly- and quarterly differences will be (if they still happen) resolved in very short time. And: not by the Accountantwhich is heavy under pressure during closing days, new by a Treasury Manager which has anyway the overview about all transactionsthroughout the month.Concerned TransactionsThe characteristic of the concerned transactions is given by the legal frame: receivables and payments need to be due and in their content needto be qualified for netting. Most intercompany transactions are:•Local expenes which have been pre-paid by a entity•Interest from intercompany loans•Products from a pre-production (e.g. unfinished goods)•Management Fee•Service Fee•Corp. Re-Charges with fix determined keyFrom Chaos to OrderA) BeforeB) AfterOrganizationAs monitored in the “After” picture above, the Corporate Netting Center is the central key-element between all group companies. Hence, thequestion for the location of the corporate netting center is already given.Preferrably the Netting Center should a) belong to the Treasury Department and b) at a location which should qualify for possible tax benefitsbecause of double tax agreements and as less as possible restrictions by local authorities. Those are complicate and often discretionary by theresponsible officials. Positive examples are the Netherlands, Luxembourg (under the consideration that both have to apply European Untionlaw), Switzerland and especially Singapore. Negative examples are all countries in Africa, Russia, most of the Latin American coutnries,especially Venezuela and Argentina.RisksNothing in our world is without risk and nothing is for free (Adam Smith mention it already in his Wealth of Nations). Starting with theimplementation risk that current processes are going to be changed can be a risk. With exact- and important, professional planning as well asbalancing strenghts - weakness - chances in a project those risks are recognized and can be held under control. In order of completeness wemention at this point the risk of transfer pricing, which, also recognized in time, is then no more risk.SummaryBy introducing a central clearing center, called Corporate Netting Center, many expensive costs are avoided with less complexetiy (mostly inrelation to IT-investments which are very low with our Treasury Software STS, valuable risks are reduced and reconciliation processes are madeclearly more simple . Order now a free presentation for managing Group Netting and see here how it works.Contact us, we would be glad to show you the possible opportunities!

Group / Intercompany NettingDo you have multiple subsidiaries with intercompany payments? Do they pay the IC-invoices to each other direct? -This bears high risks, is inefficient and cost a lot of money!

Netting, derived from the action "to net" is a process in whichreceivables and payables are compared to each other for all groupcompanies and cleared, i.e. settled vs. each other through acentralized Netting Center - also called Corporated Netting Center.Final reason is the payment (mostly, but not always in cash),reduced to just one amount which is paid / received only. But thelargest benefits are not visible at a first glance! Provided that at this point netting in organisational terms is onlyintended for for receivables and payabels occurred within a legalgroup structure: the clearing of accounts receivables- and payablesis also common practice, but ends with the single vendor-customerrelationship. However, the principle idea is the same.Way of posing a Problem / TaskMeet this example also your group?•XYZTest Group, holding in country A with subsidiaries(controlled) in countries A, B, C, D, E and F.•A delivers to B and E and invoicesin currency A.•C delivers to A and D and invoices in currency C.•D delivers to E and invoices in currenc E.•etc etc.Therefore following problems arised and in relation to it, these riskswill arise:A) Quantitative Impact1.High expenses for payment orders because of a large numberof payment transactions.2.Foreign exchange risk at the receiver of the rendered service.Those are often in other countries and/or receivables in othercurrencies than the one they need to settle the invoice.Conclusion: due to internal process external risks arebuild up! They can be measured quantitative for example withValue at Risk resp. Cash Flow at Risk.3.Foreign Exchange costs: for the same reason as 2. above thereciever of the service has to pay relative quite low amounts.Often dedited/credited from an account, which is denominatedin another currency than the invoice-currency. These additional transaction costs are approx. 2%-4% of the total invoiceamount! In these days, where margins have to be calculatedon the second digit after the comma and agreed in heavynegotiationes, this way of paying invoices can be consideredas pure destruction of money.4.With every single payment also the risk increase of manualinput errors that it will be paid too much or too less. This leadsto binding of intensive human resource power what is at theend expensive. If you would measure these items for a specificperiod the one and other CFO would wonder what he pays forthis unfavourable process.5.In case the foreign exchange risk would be centralized by anetting process, the netting center would be able a) toeliminate these fx-risk in a first step (overlay) and b) tomanage the remaining amount per currency with hedging, forinstance fx-swaps.B) Qualitative Impact1.The counterparty risk increase with every single transaction.Imagine, you give your bank a payment order and your bankhas no direct nostro account with the correspoding bank of thebeneficiary. Such payment processes through intermediarybanks are very common in the international payment system.Assume that the intermediary bank is Lehman Brothers. Youas ordering party don’t know that and have no control about it.But in case of a total shortfall of this intermediary bankyou have to pay this total loss! Because this risk is justhardly to be quantified we mention it here as qualitative risk.2.Monthly and quarterly intercompany reconciliation isunpopular, time consuming, fraught with risks and thereforeneed to be implicitely avoided. A centralized reconciliationwhich is always up to date can be outweight in these timeswith gold. Due to the permanent clearing process, the typicalmonthly- and quarterly differences will be (if they still happen)resolved in very short time. And: not by the Accountant whichis heavy under pressure during closing days, new by aTreasury Manager which has anyway the overview about alltransactions throughout the month.Concerned TransactionsThe characteristic of the concerned transactions is given by the legal frame: receivables and payments need to be due and in their content need to be qualified for netting. Most intercompany transactions are:•Local expenes which have been pre-paid by a entity•Interest from intercompany loans•Products from a pre-production (e.g. unfinished goods)•Management Fee•Service Fee•Corp. Re-Charges with fix determined keyFrom Chaos to OrderA) BeforeB) AfterwardsOrganizationAs monitored in the “After” picture above, the Corporate NettingCenter is the central key-element between all group companies.Hence, the question for the location of the corporate netting center is already given.Preferrably the Netting Center should a) belong to the TreasuryDepartment and b) at a location which should qualify for possible taxbenefits because of double tax agreements and as less as possiblerestrictions by local authorities. Those are complicate and oftendiscretionary by the responsible officials. Positive examples are theNetherlands, Luxembourg (under the consideration that both have toapply European Untion law), Switzerland and especially Singapore.Negative examples are all countries in Africa, Russia, most of theLatin American coutnries, especially Venezuela and Argentina.RisksNothing in our world is without risk and nothing is for free (AdamSmith mention it already in his Wealth of Nations). Starting with theimplementation risk that current processes are going to be changedcan be a risk. With exact- and important, professional planning aswell as balancing strenghts - weakness - chances in a project thoserisks are recognized and can be held under control. In order ofcompleteness we mention at this point the risk of transfer pricing,which, also recognized in time, is then no more risk.SummaryBy introducing a central clearing center, called Corporate NettingCenter, many expensive costs are avoided with less complexetiy(mostly in relation to IT-investments which are very low with ourTreasury Software STS, valuable risks are reduced andreconciliation processes are made clearly more simple . Order nowa free presentation for managing Group Netting and see herehow it works.Contact us, we would be glad to show you the possible opportunities!